Indonesia tax on metals risks China shipments

　　New Indonesian taxes on metals and curbs on shipment of raw minerals are likely to hit exports of nickel and bauxite to China, an industry source said on Friday, highlighting concerns over the impact of the policy on Southeast Asia's biggest economy.

　　Jakarta aims to boost investment in domestic ore processing to lift exports of higher-value finished metals by the G20 economy through the new rules which come into force on Sunday.

　　The resource-rich nation is imposing a 20 percent tax on some m etal ore exports and will prohibit shipments of raw minerals unless miners submit plans to build smelters.

　　The rules are likely to affect less than a third of Indonesia's metal exports but are a precursor to a total ban on raw material exports by 2014.

　　Around 10,000 holders of mining business permits , mostly small-scale miners in the world's top nickel miner and tin producer, will be required to produce plans of how they will process and smelt ores within Indonesia ahead of 2014, or face a ban on exporting from Sunday.

　　"China's imports of nickel laterite ores from Indonesia may fall sharply after May, which would force Chinese nickel-pig-iron producers to cut production as ore prices rise," said a trade manager at a nickel pig iron producer in China, which has two ships at an Indonesian port trying to leave by Sunday.

　　Indonesia supplied around 80 percent of China's nickel and 53 percent of its bauxite last year, according to PwC data.

　　Most major miners in Indonesia, such as Freeport-McMoRan & Gold Inc, Vale Indonesia and Aneka Tambang (Antam), hold decades long Contracts of Work (COW) agreements that they believe protect them against new rules.

　　Thursday's decision brings to an end months of uncertainty for the Indonesian mining industry, which has been unsettled by a series of regulations this year as the country seeks to derive more revenue from a sector contributing about 12 percent of GDP.

　　The duty will be applied to nickel, tin, gold, copper, silver, lead, zinc, chromium, platinum, bauxite, iron ore and manganese. Coal will be ruled upon separately, said mining minister Jero Wacik, leaving open the possibility of a future tax on coal exports in the world's top exporter of thermal coal.

　　Indonesia has already imposed similar duties on exports of palm oil and cocoa beans, reducing exports of both and driving investment in the past year in domestic processing to produce higher value products such as margarine and chocolate.

　　Currently there are no export taxes on metal ores, said an executive at state nickel and gold miner PT Aneka Tambang , though some miners have to pay a low single-digit royalty charges.

　　Indonesia has already banned exports of raw tin, leaving small-scale producers of nickel and bauxite as the most likely to be affected. Indonesia accounted for 15 percent of the world's bauxite production and 14 percent of nickel mine output last year.

　　While the tax and export curbs have been discussed in recent months and were widely expected in some form, analysts and miners said the short two year time-frame to build domestic smelters and the size of the new tax would hurt the industry.

　　"The government wants to kill a mouse in a rice field, but they're burning the whole field," said Tjahyono Imawan, president of the Indonesian Mining Services Association.

　　Two ratings agencies recently awarded Indonesia investment-grade status in recognition of strong growth and falling debt, though Standard & Poor's last month held its rating one notch below investment grade, citing policy slippage in a reference to the new mining rules.

　　CONCESSIONS

　　Many small miners have been given mining permits by local authorities under Indonesia's decentralised government system, and some may halt exports altogether rather than pay the tax or submit plans to build a smelter.

　　Much of this ore is shipped to China, often under the radar of central government officials. Some miners have been ramping up nickel exports ahead of the tax, industry sources say.

　　Government officials have said small miners needed to team up with larger firms investing in smelters to avoid the 2014 ban, and have said the government will provide industry investment incentives, such as tax allowances and tax holidays.

　　"This places the government in an advantageous position to demand concessions from miners in return for permission to export," said Jakarta-based risk consultancy Concord Consulting.

　　The government has said it will negotiate all contracts with miners, including royalties and a recent rule requiring foreign miners to divest at least half their assets after 10 years of production, a change seen as part of a growing trend of global resource nationalism.

　　Firms with long-standing COW contracts such as Freeport and Newmont account for 70 percent of mining output and exports, and following the new regulation, this could rise to 80 or 90 percent, the Indonesian Mining Association said.

　　"This policy is good for Indonesia because the government will be able to control the small and medium miners which are so far not friendly to the environment," said Syahrir Abubakar, executive director of the Indonesian Mining Association.